by Darrell Martin
When trading Binary Options, it is important to take into consideration how time management can affect your trade. In a previous article, Binary Option Trading: Exit Before Expiration? , being able to exit prior to expiration was discussed. You want to receive the highest possible payout at settlement. You must also look at the ROI (Return On Investment) of the trade.
What would happen if you were to buy an Out of The Money (OTM) binary strike with an end of the day expiration time? An OTM binary has a strike price of less than 50. The more the underlying price is below the binary strike, the lower the binary is priced.
For the example, let’s suppose you bought the binary at 20. This means that you have a potential profit of 80 at settlement, if the binary finishes in the money. Now, let’s suppose that the underlying price escalates above the strike before lunchtime. Your binary is now priced at 97 / no offer with five hours until expiration.
The binary is now in the money and profitable. You have a choice to make. Do you hold it for the next five hours in order to receive the full payout of $100, or do you exit now, taking $97? Is it worth it to squeeze out the extra $3? If you look at the ROI, you would have a 385 percent return if you close early compared to a 400 percent return receiving the settlement payout (fees not included).
Five hours remain until expiration for this trade. There is a good chance the market will not remain where it is for the next five hours. It could reverse a little or it could reverse a lot where you forgo the max settlement payout to having the max loss of the original trade cost…
Consider the fact that your trading capital is tied up in that trade. You may decide that it isn’t worth holding out five hours to collect three dollars!
There is also the relationship of time decay. As time moves closer to expiration, the percentage price change of the binary can exceed the change of the underlying market.
Yes, when trading binaries, you always want to receive the most possible profit payout at expiration, but there are other aspects to consider that may cause you to close your trade before expiration.